USDA Adjusts GSM 102 Fees To Help Comply With U.S.-Brazil Cotton Deal

Posted: March 1, 2011

The U.S. Department of Agriculture (USDA) has altered the fees that it charges under the General Sales Manager (GSM) 102 program in order to help comply with the terms of a bilateral framework agreement to which the United States and Brazil agreed last year, sources said.

As part of that framework, the United States is obligated to try to lower the average length of loan tenors for transactions made under the GSM 102 program to 16 months by the end of 2012. The latest fee change is partly designed to provide an incentive for U.S. exporters to utilize shorter loan tenors under the program, sources said.

Brazil has long pushed the United States to offer shorter tenor options, as doing so would make the program less attractive to U.S. exporters, thereby driving down its use. In the context of the Doha round, the United States has already agreed to maintain tenors no longer than 180 days in length (Inside U.S. Trade, May 28).

On fees, U.S. negotiators last fall pledged to take action prior to the next meeting under the framework, which is taking place later this week in Brasilia. USDA announced the fee change on Feb. 14, and it took effect on Feb. 17.

Generally speaking, USDA increased fees for transactions with countries that are classified by USDA as higher-risk countries and for transactions with longer tenors, while decreasing fees for transactions with the lowest-risk countries. USDA classifies countries on a risk scale of zero to seven, with zero representing the safest countries.

For instance, USDA decreased fees for all transactions involving countries with a risk category of zero or one, regardless of the length of the tenor for those transactions. In transactions with an annual payment of principal, USDA unveiled new fees last month for tenors as short as nine months and as long as 36 months.

However, USDA increased fees for all transactions involving an annual repayment of principal in risk categories three, four, five and six, with one exception in risk category three, where for the nine-month tenor category the fee was unaltered compared with the previous fee schedule.

Categories three through six are the most popular categories for use by U.S. exporters, sources have said.

It is possible that these changes could provide an incentive to utilize transactions involving safer countries, as USDA increased the fees for higher-risk countries while lowering them for the safest countries, one source said.

However, the changes are also meant to provide an incentive to use shorter loan tenors even in risk categories three through six, where USDA increased practically all the fees in the different types of transactions. This is because in these categories, USDA increased the fees in the longer tenor categories by a greater amount, one source said.

Under the GSM 102 program, USDA provides credit guarantees to encourage financing of commercial exports of U.S. agricultural products. The program is designed to reduce financial risk to lenders, thereby encouraging exports, primarily to markets in developing countries.

Specifically, the program guarantees credit extended by the private banking sector in the United States to approved foreign banks for purchases of U.S. food and agricultural products by foreign buyers. USDA guarantees payments due from the approved foreign banks to financial institutions in the United States.

Because payment is guaranteed, financial institutions in the United States can offer more competitive credit terms to the foreign banks. Under the 2008 farm bill, USDA is instructed to charge fees that are no higher than what is needed to offset the operating costs of the GSM 102 program and losses over a 10-year period.

In addition to trying to live up to the bilateral framework, USDA is adjusting fees to better fit its data and to help ensure that it meets the instructions outlined in the farm bill, one source said.

In a challenge mounted by Brazil that also ruled against U.S. cotton-specific subsidies, the World Trade Organization ruled that the GSM 102 program was a prohibited export subsidy. Under the terms of the bilateral framework deal, Brazil has agreed to not retaliate against U.S. exports.

Brazil is entitled to retaliate against U.S. exports due to its success under the WTO challenge, and the fact that the United States has failed to comply with the rulings and recommendations in that case. The framework is due to expire at the end of 2012, when a new farm bill is expected to be in place.

U.S. trade officials are slated to travel to Brasilia March 3-4 for meetings with their Brazilian counterparts under the auspices of the framework deal. According to a Brazilian official, the two sides will discuss the 2012 farm bill and operation of the GSM 102 program.

The meeting in early March will not serve as an “operational review” of the GSM 102 program, meaning that the two sides will not examine data on the usage of the program or agree on fee rate changes if that usage is high enough, as called for under the framework. The next such review will likely occur around April (Inside U.S. Trade, Feb. 18).

Instead, the two sides will examine broader topics, such as the next farm bill and U.S. cotton-specific subsidies. The two sides will also discuss the GSM 102 program, although they will not formally review it, the official said.

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